RISK ASSESMENT DONE BELOW:
| Potential Risk Type of Risk, Description | Accounts | Assertions |
| Inherent Risk (high), Risk of currency movement. | Accounts Receivables, Accounts Payables, Sales, Purchases | |
| Inherent Risk (Medium), Risk of missing the estimate of the increasing revenue. | Financial Statement | |
| Inherent Risk (high), Misstatement of account receivables and/or account payables due to incorrect application of the exchange rate. | Account Receivables, Account Payables, Forex Gain or Loss | - Valuation
- Presentations and Disclosure
|
| Control Risk (high), Obsolesce of inventory. | Inventory | |
| Control Risk (high), Implementation of the system without BCP no trial run of the new implemented software will lead to inaccuracy of the Input-Processing-Output. | Inventory | |
| Control Risk (high), Account receivables not recovered due to the COVID-19 pandemic. | Account Receivables, Provision of Allowance, Bad Debts | |
QUESTION (3 PARTS):
Background Curtains Master is a large proprietary company established in North Queensland in the 1990s, selling a wide range of high-quality fabric curtains for household decoration. The company purchases products from manufactures in Vietnam, Bangladesh, and China, and then sells its products to wholesales customers in Australia, Germany, and the United States. The company also places its products on consignment in various small retail stores in Queensland. Sales mainly peak from the second half of the financial year, generating an average of 60% of revenue for the whole year. In past years the company has performed well, with its profit rate at around 12% and an average increase in annual revenues of 5%. In the last two years, the company has extended its marketing from Germany to other countries in Europe. As a result of this, in the budget for the year 2019-2020, the company while aiming to maintain its profit rate, plans to increase its revenues by 8%. The company uses USD to pay its suppliers and EUR or USD in its dealings with customers. While the business is expanding in Europe, sales in Australia and US are struggling to reach their targets. These markets are quite competitive, providing more affordable products with a large range of designs and choices. Further, in recent years, countries like Vietnam and China have become more eco-conscious, attempting to reduce their industrial impact on the environment. As such, textile manufacturing has been discouraged with strict regulations. Some of CurtainsMaster's suppliers have reduced their production capacity and have experienced an increase in production costs. Managing inventory on consignment has been an issue for Curtains Master in the past 12 months. On several occasions, the company lost track of their inventory movements and status at the various retail premises. To support the business expansion and strengthen internal controls for inventory, in January 2020 the company installed a new inventory management system on the cloud, which allows inventory movements to be followed up, from production to end-users. The system will also help to follow up and calculate inventory ageing from the day the inventory was entered into the system. In the past five years, old and work-in-progress inventory has piled up due to new designs, orders cancelled by customers, or specification problems. When the new system was implemented these stock items, together with others, were entered into the system as the beginning balance for the inventory Since January 2020, CurtainsMaster has also experienced significant impact due to the COVID-19 pandemic. Approximately 50% of customer orders due to be delivered in May, June and July have been cancelled. Payments from customers have been delayed as they have also been impacted by the situation. Since the middle of February the company's sales at small retail stores have decreased dramatically, by approximately 70%. From the middle of March, 60% of staff (both casual and full-time) were made redundant. For the last three months of the current financial year, the company is expecting to have no sales but still pay another 10% tot pembes. To minimise Since January 2020, Curtains Master has also experienced significant impact due to the COVID-19 pandemic. Approximately 50% of customer orders due to be delivered in May, June and July have been cancelled. Payments from customers have been delayed as they have also been impacted by the situation. Since the middle of February the company's sales at small retail stores have decreased dramatically, by approximately 70%. From the middle of March, 60% of staff (both casual and full-time) were made redundant. For the last three months of the current financial year, the company is expecting to have no sales but still pay another 10% of the current total expenses. To minimise the impact of a tight cashflow, in February, when the financial market was peak, the company sold all its financial investments and generated some extra cash for the business before the market dived in March. However, things can get worse; there is much uncertainty and no clear indication of when the pandemic will end. Financial Information: Budget Actual Actual Account Sales Revenue Growth FX Gain/Loss (% on Total Revenue) Other Revenue 1% on Total Revenue) Total revenue COS Salaries expenses Administration expenses Selling expenses Borrowing Costs Total expenses Profit before income tax (% on Total Revenue Income Tax expense (% on Sales Revenue) Profit after income tax (% on Total Revenue) Growth Actual the first 9 months 31-Mar 2020 62.7497877 -50,5% -1012320 -1.49 % 10,561 423 140% 72,298.980 36394929 18,145,600 9,450,120 5,019,990 3.430,468 72,441,106 -142.126 02 30-Jun 30-Jun 2019-2020 2019 2018 137.000.000 123886 497 120.156.721 BOP 5.6% 59% -150,000 -11.230 120,301 -0.1% 0.0% 0.1% 600.000 712356 0.4% 0.7% 0.8% 137.450,000 127.762.466 120.989 378 73,980,000 71,066.879 62,690,838 20,420,000 18,301,680 16.023,508 10,960,000 8.381.985 7209,403 6.850.000 5.075.420 4806,269 2,800,000 3.086,096 2.945,001 115,010,000 106,401,058 100,675,079 22.440,000 21,361,407 20,314 209 16.3% 16.7% 16B 5,610,000 5.563. 5,078,575 4.1% 44% 42 16,830,000 15,807,442 15,235,724 122% 124% 120% 6.9% 3.8% 00% -142,126 0.2% -100.9% 5,420,140 7.000,500 11.145,100 23,565,740 8,041,120 5.145.100 4225.001 17.411.221 7,050,100 4689,456 4.000 450 15,740.006 Current assets Cash Accounts Receivable Inventory Total current assets Non-current assets Property, plant and equipment Intangible assets Total non-current assets Total assets 9,450,000 2,040,120 11,490,120 35,055.860 12,960,400 2.400.410 15,350,810 32.762.031 12400,550 2514,500 14,915,050 30,655,056 10,780,125 6.250.000 17,030,125 5.615.610 3.250.000 8,865,610 4561786 2.250,000 6,811,780 Current Liabilities Accounts Payable Interest Bearing Liabilities Total current liabilities Non-current liabilities Deferred tax liabilities Interest-bearing liabilities Total non-current liabilities Total liabilities Equity Requirements 405,126 3,000,000 3,406,126 20,435,251 14,620,609 660041 6.000.000 6.650,041 15.515 651 17.246.380 756,100 6000,000 6,756,100 13,567,880 17,087,176 mar description 2 Analytical Procedures As part of the risk assessment phase, you conducted analytical procedures and the results are as below: Interim Budget Actual Actual Account 30-Jun 2019-2020 30-Jun 30-Jun 2020 2019 2018 Total revenue 100% 100% 100% 100% COS 55% 5494 5694 58% Salaries expenses 28% 15% 149 13% Administration expenses 89% 6% Selling expenses 8% 5% 42 Borrowing Costs 59 29 29 Interim Budget Actual 49 Ratios Actual 30-Jun 2019-2020 2020 30-Jun 2019 30-Jun 2018 2.0 0.9 1.4 0.3 1.3 2.6 43 2.3 1.0 4.9 6.8 6.5 Liquidity ratios Current ratio Quick ratio Inventory turnover Accounts receivable Solvency ratios Debt to equity Times interest eamed Profitability ratios Gross profit ratio Net profit ratio ROA Return on Sh funds 0.8 1.4 -1.0 0.9 6.1 7.0 0.46 0.12 0.3621 -0.102 -0.054 -0.116 0.44 0.12 0.121 0.23 0.42 0.13 0.13 0.23 Using the above analysis and financial information given, discuss the results of the analytical procedures by outlining six (6) potential problem areas (that is, where possible material misstatements in the financial reports exist) and any other special concerns (for example, going concern). Specify the account balances and related assertions that would require particular attention in the audit. For each problem identified, you must use the above quantitative analysis to support your argument. 3. Planning Materiality The audit firm dictates that one planning materiality amount is to be used for the financial statement as a whole. The planning materiality bases are as follows: Base Threshold (%) Profit before tax 5-10 Turnover 0.5-1 Gross profit 2.0-5 Total assets 0.5-1 Based on the information given and your risk assessment, select the base for planning materiality that you believe is most appropriate, and provide three reasons justifying the base you have chosen, calculate the planning materiality. (You can refer to Cloud 9 case and textbook pages 123-125 and other resources for further understanding.) 4. Conclusion Based on the risk assessment processes and analytical procedures undertaken in the previous sections, conclude the overall level of risk, materiality of the firm and recommend the areas of audit focus. Background Curtains Master is a large proprietary company established in North Queensland in the 1990s, selling a wide range of high-quality fabric curtains for household decoration. The company purchases products from manufactures in Vietnam, Bangladesh, and China, and then sells its products to wholesales customers in Australia, Germany, and the United States. The company also places its products on consignment in various small retail stores in Queensland. Sales mainly peak from the second half of the financial year, generating an average of 60% of revenue for the whole year. In past years the company has performed well, with its profit rate at around 12% and an average increase in annual revenues of 5%. In the last two years, the company has extended its marketing from Germany to other countries in Europe. As a result of this, in the budget for the year 2019-2020, the company while aiming to maintain its profit rate, plans to increase its revenues by 8%. The company uses USD to pay its suppliers and EUR or USD in its dealings with customers. While the business is expanding in Europe, sales in Australia and US are struggling to reach their targets. These markets are quite competitive, providing more affordable products with a large range of designs and choices. Further, in recent years, countries like Vietnam and China have become more eco-conscious, attempting to reduce their industrial impact on the environment. As such, textile manufacturing has been discouraged with strict regulations. Some of CurtainsMaster's suppliers have reduced their production capacity and have experienced an increase in production costs. Managing inventory on consignment has been an issue for Curtains Master in the past 12 months. On several occasions, the company lost track of their inventory movements and status at the various retail premises. To support the business expansion and strengthen internal controls for inventory, in January 2020 the company installed a new inventory management system on the cloud, which allows inventory movements to be followed up, from production to end-users. The system will also help to follow up and calculate inventory ageing from the day the inventory was entered into the system. In the past five years, old and work-in-progress inventory has piled up due to new designs, orders cancelled by customers, or specification problems. When the new system was implemented these stock items, together with others, were entered into the system as the beginning balance for the inventory Since January 2020, CurtainsMaster has also experienced significant impact due to the COVID-19 pandemic. Approximately 50% of customer orders due to be delivered in May, June and July have been cancelled. Payments from customers have been delayed as they have also been impacted by the situation. Since the middle of February the company's sales at small retail stores have decreased dramatically, by approximately 70%. From the middle of March, 60% of staff (both casual and full-time) were made redundant. For the last three months of the current financial year, the company is expecting to have no sales but still pay another 10% tot pembes. To minimise Since January 2020, Curtains Master has also experienced significant impact due to the COVID-19 pandemic. Approximately 50% of customer orders due to be delivered in May, June and July have been cancelled. Payments from customers have been delayed as they have also been impacted by the situation. Since the middle of February the company's sales at small retail stores have decreased dramatically, by approximately 70%. From the middle of March, 60% of staff (both casual and full-time) were made redundant. For the last three months of the current financial year, the company is expecting to have no sales but still pay another 10% of the current total expenses. To minimise the impact of a tight cashflow, in February, when the financial market was peak, the company sold all its financial investments and generated some extra cash for the business before the market dived in March. However, things can get worse; there is much uncertainty and no clear indication of when the pandemic will end. Financial Information: Budget Actual Actual Account Sales Revenue Growth FX Gain/Loss (% on Total Revenue) Other Revenue 1% on Total Revenue) Total revenue COS Salaries expenses Administration expenses Selling expenses Borrowing Costs Total expenses Profit before income tax (% on Total Revenue Income Tax expense (% on Sales Revenue) Profit after income tax (% on Total Revenue) Growth Actual the first 9 months 31-Mar 2020 62.7497877 -50,5% -1012320 -1.49 % 10,561 423 140% 72,298.980 36394929 18,145,600 9,450,120 5,019,990 3.430,468 72,441,106 -142.126 02 30-Jun 30-Jun 2019-2020 2019 2018 137.000.000 123886 497 120.156.721 BOP 5.6% 59% -150,000 -11.230 120,301 -0.1% 0.0% 0.1% 600.000 712356 0.4% 0.7% 0.8% 137.450,000 127.762.466 120.989 378 73,980,000 71,066.879 62,690,838 20,420,000 18,301,680 16.023,508 10,960,000 8.381.985 7209,403 6.850.000 5.075.420 4806,269 2,800,000 3.086,096 2.945,001 115,010,000 106,401,058 100,675,079 22.440,000 21,361,407 20,314 209 16.3% 16.7% 16B 5,610,000 5.563. 5,078,575 4.1% 44% 42 16,830,000 15,807,442 15,235,724 122% 124% 120% 6.9% 3.8% 00% -142,126 0.2% -100.9% 5,420,140 7.000,500 11.145,100 23,565,740 8,041,120 5.145.100 4225.001 17.411.221 7,050,100 4689,456 4.000 450 15,740.006 Current assets Cash Accounts Receivable Inventory Total current assets Non-current assets Property, plant and equipment Intangible assets Total non-current assets Total assets 9,450,000 2,040,120 11,490,120 35,055.860 12,960,400 2.400.410 15,350,810 32.762.031 12400,550 2514,500 14,915,050 30,655,056 10,780,125 6.250.000 17,030,125 5.615.610 3.250.000 8,865,610 4561786 2.250,000 6,811,780 Current Liabilities Accounts Payable Interest Bearing Liabilities Total current liabilities Non-current liabilities Deferred tax liabilities Interest-bearing liabilities Total non-current liabilities Total liabilities Equity Requirements 405,126 3,000,000 3,406,126 20,435,251 14,620,609 660041 6.000.000 6.650,041 15.515 651 17.246.380 756,100 6000,000 6,756,100 13,567,880 17,087,176 mar description 2 Analytical Procedures As part of the risk assessment phase, you conducted analytical procedures and the results are as below: Interim Budget Actual Actual Account 30-Jun 2019-2020 30-Jun 30-Jun 2020 2019 2018 Total revenue 100% 100% 100% 100% COS 55% 5494 5694 58% Salaries expenses 28% 15% 149 13% Administration expenses 89% 6% Selling expenses 8% 5% 42 Borrowing Costs 59 29 29 Interim Budget Actual 49 Ratios Actual 30-Jun 2019-2020 2020 30-Jun 2019 30-Jun 2018 2.0 0.9 1.4 0.3 1.3 2.6 43 2.3 1.0 4.9 6.8 6.5 Liquidity ratios Current ratio Quick ratio Inventory turnover Accounts receivable Solvency ratios Debt to equity Times interest eamed Profitability ratios Gross profit ratio Net profit ratio ROA Return on Sh funds 0.8 1.4 -1.0 0.9 6.1 7.0 0.46 0.12 0.3621 -0.102 -0.054 -0.116 0.44 0.12 0.121 0.23 0.42 0.13 0.13 0.23 Using the above analysis and financial information given, discuss the results of the analytical procedures by outlining six (6) potential problem areas (that is, where possible material misstatements in the financial reports exist) and any other special concerns (for example, going concern). Specify the account balances and related assertions that would require particular attention in the audit. For each problem identified, you must use the above quantitative analysis to support your argument. 3. Planning Materiality The audit firm dictates that one planning materiality amount is to be used for the financial statement as a whole. The planning materiality bases are as follows: Base Threshold (%) Profit before tax 5-10 Turnover 0.5-1 Gross profit 2.0-5 Total assets 0.5-1 Based on the information given and your risk assessment, select the base for planning materiality that you believe is most appropriate, and provide three reasons justifying the base you have chosen, calculate the planning materiality. (You can refer to Cloud 9 case and textbook pages 123-125 and other resources for further understanding.) 4. Conclusion Based on the risk assessment processes and analytical procedures undertaken in the previous sections, conclude the overall level of risk, materiality of the firm and recommend the areas of audit focus
